Ethereum is one of the two largest cryptocurrencies right now, with a market cap of 15.6 billion USD, currently processing 500K-600K transactions per day. You have probably already heard about the other big coin, Bitcoin. Ethereum shares many common elements with it but it can do a lot more as well.

My aim is to explain how Ethereum works in a simple way without scary looking formulas and complex definitions. I am pretty sure that by the end of this article, you will have decided to be a part of this ecosystem. Don’t worry, I will help you with that too!

 


TABLE OF CONTENTS


 

Introduction to Ethereum

According to the official website of the project

“Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.”

ethereum technology

Kind of confused? In essence, Ethereum is a public database used and shared by a group of non-trusting individuals, in order to track digital transactions. No central/single individual, organization or bank maintains the database; several thousand individuals do and everyone has a copy of the database with themselves. In case you are not familiar with the term database this is the Wikipedia explanation:

A database is an organized collection of data, generally stored and accessed electronically from a computer system.

 

how does ethereum work

Database implementation.

 

How does Ethereum work?

So Ethereum is a database we can use without trusting each other to keep track of transactions made between people in the Ethereum network. If you are still confused, you can think of it as a bank. It keeps track of the money transfers between its users and people trust the bank with their money.

Ethereum technology has a huge difference with banks. It does not require any central authority to maintain and secure it. It operates as a “trustless” transactional system — a framework in which individuals can make peer-to-peer transactions without the need to trust a third party or one another. Pretty cool right?

 

what is ethereum

The main problem with conventional currencies like USD EUR JPY GBP AUD etc is that trust to an organization or an authority is required to make them work. Central banks gain enormous amounts of power since people trust them to ensure the financial markets work normally — and they don’t deliver. I am not going to start a rant about banks and financial institutions but I’m pretty sure you get the point based on your experiences. According to Satoshi Nakamoto, the man who created bitcoin and started the crypto revolution:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

 

Delving deeper into the Ethereum Network

The fact that Ethereum is decentralized, secure (based on mathematical proofs) and actually works is the reason it will possibly be one of the major currencies used globally. When people realized Ethereum is a working digital currency they can use to control their own money, without a bank involved, the price skyrocketed. From 0.9$ in 2015, it almost got to 1.4K in January 2018. Let’s look at some numbers. On December 31, 2017, the number of transactions on the Ethereum blockchain reached almost 1.1M. This large amount of money transfers in a day reflect the value of this project.

 

cryptocurrency ethereum

Ethereum transactions per day from June 2016 to January 2018.

 

Currently, the network can handle 26+ transactions per second with a 15.5B market cap but that doesn’t properly show its fortitude, to be honest. Ethereum has an unreal amount of scientists and developers working on it every day to make sure it can scale for global usage. Trust me, you are not late for the party.

 

Differences between Ethereum and Bitcoin

“But this is the same thing with Bitcoin why should I use Ethereum?”

Ethereum was not created with the purpose of being primarily a digital currency payment network. Of course, this is also possible but it’s not the main goal. Ethereum is a global computer. It is designed to be a general-purpose programmable blockchain. To put this simply, people can write code and run it on the network.

Many people see Ethereum and Bitcoin as competitors. This is not true at all. Each of them has a specific usage and completes the other one. BTC is used for a large number of transfers. It’s more simple and more stable. BTC is nothing more and nothing less than a monetary system controlled by its people. Ethereum is more than that. It’s a system and a global computer. A global financial infrastructure. Also, Ethereum is much more flexible and easy to upgrade than BTC.

ethereum vs bitcoin

 

What are Ethereum DApps? Why is their existence important?

“Why would anyone create this?”

This feature of a global programmable computer can be used for a variety of applications. These applications are called DApps, or decentralized applications. A DApp is a web application that is built on top of open, decentralized, peer-to-peer infrastructure services, like Ethereum. This allows us to build companies, run by code without any central control. Doesn’t this blow your mind? It’s so good to be true, yet it is! There is already a large number of applications running on the main network ranging from Token systems to wallets, hedging contracts, lotteries etc. Even games are now getting built on Ethereum.

“The concept of DApps is meant to take the World Wide Web to its next natural evolutionary stage, introducing decentralization with peer-to-peer protocols into every aspect of a web application. The term used to describe this evolution is web3, meaning the third “version” of the web. First proposed by Dr. Gavin Wood, web3 represents a new vision and focus for web applications: from centrally owned and managed applications, to applications built on decentralized protocols. — Andreas Antonopoulos, Mastering Ethereum”

 

List of large DApps currently online

I want to prove to you that this is actually happening cause I had a hard time believing this is actually viable and stable. Here are some of the most used DApps running on the Ethereum blockchain already:

  1. IDEX: decentralized exchange for trading etc
  2. Cryptokitties: game centered around breedable, collectible creatures we call CryptoKitties!
  3. uPort: identity management platform
  4. Gnosis: prediction market platform
  5. Saturn (my favorite): zero-fee decentralized exchange for Tokens built on ethereum!
  6. Ethlance: Freelance site like Upwork for Ethereum

The list goes on and on… Decentralized companies that are actually working and making money on the global market. According to the founder of Ethereum Vitalik Buterin:

“The blockchain has the ability to enhance reliability in business processes by eliminating political and economic risks associated with trusting a centralized system.”

Also, note that DApps don’t necessarily need to be complex. Let me give you an example of a simple but practical DApp. Imagine that you want to charge your laptop and your Tesla car from my house every two days. We want to find a way for you to pay me without having to meet every time and exchange cash. We can create a DApp, which is not hard at all, on the Ethereum blockchain that gets two inputs.

The amount of electricity you used and the current price for the electricity and multiply them to find out how much you need to pay me. Then the contract converts EUR to eth coins and sends this amount from your Ethereum wallet to mine. We don’t need to meet, we don’t need to pay fees to a bank and I don’t need to wait 2 days to receive the money. Easy, fast and decentralized. A human being and a DApp are both seen as users on Ethereum. Whatever a human user can do, a DApp can do too. Actually, DApps can do some more. This is the future. In a few years, I’m pretty sure that this system will be used globally.

what is ether

 

What is Ether?

When I first understood how Ethereum works the first question that came to my mind was “Ok so we have a decentralized global computer with billions of dollars in it, can it be hacked?”. Here comes ether, the currency used in the network. You will probably find ether noted with a bunch of different names such as ether coin, eth coin, and ether currency. So what is ether? This is what you buy in exchanges, like Kriptomat.

To get anything done on this world computer, you need to pay a fee. You don’t pay this fee with dollars or pounds. Instead, everything gets paid with a cryptocurrency native to the network, ether. If you want to attack Ethereum you need to spend billions of dollars on fees in order to have a decent attack. This keeps the network pretty secure.

ethereum security

 

Let’s sum up. The Ethereum cryptocurrency is a global digital currency payment system that is secure, stable, very soon scalable according to the team’s plans and programmable. You can send money to your friend living at the other side of the planet within seconds with fees close to zero (unlike bank fees…). You can also build companies, games, and anything else the human mind can perceive on Ethereum and interact with them through your browser. This is the future and it’s coming fast.

So this is what Ethereum can do:

  • Fight censorship
  • Make companies and organizations more transparent
  • Insurance services with the use of cryptography
  • Reduce bureaucracy
  • Low Fees compared to the existing banking system
  • Fast Transactions
  • Reduce fraud with digital identity systems

 

How to buy Ethereum online

kriptomat buy ethereum

The easiest and most common way to buy Ethereum, pretty much any crypto coin in general, is by using an online exchange. Exchanges are online platforms where you can exchange fiat money(eg. EUR) for cryptocurrency (eg. Eth/Ethereum Coin). You can also exchange one cryptocurrency for another, but let’s stick to Ethereum and fiat. 

Apart from Eth, you can buy other cryptocurrencies as well on Kriptomat. 30 of the most used and established currencies are listed on the site.

crypto trading online

 

7 key factors you should look for in every exchange

When you choose the exchange you are gonna use always look out for these 7 things:

  1. A list of the team working on the exchange. This is crucial. Never trust an exchange if its team is anonymous. 
  2. Responsive Support. 
  3. Transparent fees. It’s extremely important to know what you pay to the exchange for its services. 
  4. Open API. If you are a programmer you know how it feels using exchange with no API or a really bad one.
  5. A bunch of informational content for people who are new to the crypto community. Yeah, they took care of that as well.
  6. 2FA (two-factor authentication) for security. You need security when you deal with money. This is a must. 
  7. Referral System. Get some profits if your friends sign up with your link.

 

Buy Ethereum on Kriptomat

kriptomat exchange

 

Before we start make sure you check the video guides the Kriptomat team uploaded on Youtube, here. Ranging from how to make an account to buying crypto with your credit card etc. 

 

Follow the step by step guide on how to buy Ethereum

1. Create an account and confirm your email and phone.

2. Navigate to the Buy/Sell Tab of the menu bar. In the box below you can see the list of all the cryptocoins available on Kriptomat. Click on Ethereum.

kriptomat ethereum

3. Select a payment method. Bank transfer/Credit Card.

4. Enter the amount of EUR you want to spend and the site will automatically convert it to Eth and click on the buy button.

kriptomat payment method

5. On your right, you will see the “Confirm Transaction” box. Click on it and confirm your transaction. This depends on whether it is a credit card payment or bank transfer but both of them are really easy to confirm.

kriptomat transaction

6. Now you just need to wait and soon you will see your first Ether in your wallet. You are officially a holder of ether cryptocurrency!

 

“Blockchain technology isn’t just a more efficient way to settle securities. It will fundamentally change market structures, and maybe even the architecture of the Internet itself.”

The future is decentralized. We need to adapt and adjust to this environment.